MPC member Martin Weale pours scepticism on Mark Carney's flagship policy
claiming that forward guidance has not had much effect on the economy

MARTIN Weale, a top policy maker at the Bank of England, has broken ranks and claimed that Mark Carney’s flagship forward guidance strategy is not having the big economic impact the Governor planned.

The economist, who was the only member of the Monetary Policy Committee to vote against the introduction of forward guidance in August, said the policy has provided a “modest stimulus not a large stimulus to the economy”.

Mr Weale’s comments, made in a speech in London, appears at odds with the Governor’s assertion that forward guidance has “reinforced the recovery.”

Forward guidance, the pledge that the MPC will not raise interest rates until unemployment falls below 7pc, was introduced by Mr Carney as soon as he took over at the Bank in the summer. It was designed to boost business and consumer confidence and encourage borrowing.

In his speech at the National Institute of Economic and Social Research, Mr Weale said: “This decline in uncertainty probably provides some stimulus to the economy but the effect is almost certainly very small.”

He said it was “inconceivable” that the MPC would have raised interest by now without forward guidance. He added: “If forward guidance has done no more than to codify what people had expected the Monetary Policy Committee to do anyway, then its effects on the profile of expected future rates, and thus on output and inflation, should be expected to be small.”

Mr Weale argued that the policy has led to market expectations of rates being about 0.25pc lower two years from now that they would otherwise have been. He said if this view was widely held by households as well as businesses it could lead to output growth of as much as 0.75pc. But he argued that few households, whose consumption accounts for two thirds of GDP, would have noticed. “Unless people have taken an unusual interest in what my colleagues and I have said about policy, it seems to me likely that the initial effects will be appreciably smaller,” he said.

Mr Weale repeated Mr Carney’s message that forward guidance is intended to be a “threshold not a trigger” and that interest rates would not necessarily rise as soon as unemployment drops below 7pc. However Mr Weale added that if the jobless rate was dropping rapidly at the 7pc level, the case for an early rate rise would be strong.

The British Chambers of Commerce has said it expects the 7pc unemployment threshold to be reached in the third quarter of 2015 - a quarter earlier than it has previously forecast.

In its latest Economic Forecast published today, the trade body also upgraded its growth forecasts for the UK economy to 1.4pc from 1.3pc in 2013 and from 2.2pc to 2.7pc in 2014. If the trade body is correct, UK GDP will rise about its 2008 pre-recession peak in the second half of 2014.

The BCC said the growth would be fuelled by rising household consumption However, high levels of personal debt may curb household consumption in 2015, causing a slight slow down in GDP, the BCC said.

The BCC has forecast £106bn of public borrowing for 2013-4, some £5.2bn lower than the Office for Budget Responsibility predicted at the Autumn Statement.

John Longworth, director general of the BCC, said: “The upgrading of our short-term forecasts is testament to the sheer hard work of UK businesses across the country, who have long-remained confident in difficult circumstances.”